Fare wars intensify in New Zealand and Malaysia

Analysis

The fare war in the New Zealand domestic market has turned ugly, with Air New Zealand accusing new entrant, Pacific Blue, of misleading travellers by selling seats for services the airline plans to cancel, while promoting others below the true cost via its website.

Air New Zealand also claimed Pacific Blue was attempting to cover up a 10% increase in its fares this week. After cutting domestic fares by up to 30% in Jan-08 in response to Pacific Blue's entry, Air New Zealand then pushed through two separate 3% domestic fare increases on 26-Mar-08 and 06-May-08. The carrier claims it has no plans to match Pacific Blue’s increase.

Group General Manager Short Haul Airline, Bruce Parton, stated, "to vehemently say that you won’t raise fares and then turn around a few weeks later and do so on the quiet is incredibly deceptive”.

But Air New Zealand could be accused of the same behaviour in long-haul international markets. On 17-Mar-08, Mr Parton stated a decision on the scale of long-haul fare increases was expected to be made “within the next fortnight”. On 23-Apr-08, the carrier stated, in an Investors Update, that it had “recently increased ticket prices”, by an undisclosed amount. Then on 30-Apr-08, it revealed in a press release announcing its latest domestic fare increase that long-haul international fares had increased by 4-8% “over the last two months…and look certain to rise further as fuel continues to spiral”.

The war of words reflects a domestic market showing increasing signs of strain under extreme fuel prices. But the discounting will continue to spread, as Pacific Blue, which says it remains committed to the market over the long-term, launches services to Dunedin in Jul-08.

Meanwhile, Malaysia Airlines’ new 'Everyday Low Fares' offering of one million free seats (initially on domestic services, plus taxes and charges, for travel between 10-Jun-08 and 14-Dec-08) has created a big stir in Malaysia.

According to CEO & Managing Director, Idris Jala, “we wanted to do it last year, but we were not confident - now we are confident to implement it”. He added, “the issue here is when times are tough, only airlines that know how to manage their business are winners and we want to make sure that MAS is one of those airlines that are winners”.

AirAsia’s Tony Fernandes observed, as the lowest cost LCC in the world, “airlines that divert from their traditional model will pay the price. You are either a premier airline or an LCC, it is hard to be in between. You cannot have a cost structure of a low cost carrier if you have Business and First Class. It is not feasible”.

Idris Jala yesterday clarified the offer was not designed to drive AirAsia into the ground and that MAS is only selling seats which would otherwise have been empty. But the online promotion, which has reportedly sold 50,000 seats in two days, does directly tap into AirAsia’s core market.

Mr Fernandes added AirAsia is planning its own discount fares campaign and has also ramped up calls for further route access, particularly to Singapore. Mr Fernandes, stated, “you can't keep on whacking AirAsia and give all the advantages to MAS. It is clear than MAS wants to take us on, we are ready to be taken on. We are not afraid of competition”.

International experience suggests that MAS could be quite successful in its move. Whether this translates into success in Malaysia against a nearly “pure” LCC is another question.

What’s certain is that New Zealand and Malaysian aviation will never be the same again.

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